Oil reclaims $70, with gas futures up

Oil supply at 8-year high; gas stock up less than expected

SAN FRANCISCO (MarketWatch) -- Crude-oil futures reclaimed the $70 a barrel level and gasoline futures closed 3% higher Wednesday, as a smaller than expected rise in U.S. gasoline supplies and tension between Western nations and Iran and North Korea outweighed an eight-year high in U.S. crude inventories.

Crude for August delivery touched a low of $68.80 a barrel on the New York Mercantile Exchange, then recovered to trade as high as $70.75. The contract closed at $70.33, up 99 cents -- at its highest closing level since June 12.

A U.S. government report issued Wednesday pegged supplies at their highest level since late May of 1998 -- a time when futures prices traded at just more than $16 and spot prices were above $15.

"Crude inventories posted a solid gain this week, reversing last week's decline on the back of a bounce in imports," said Daniel Jester, an economist at Moody's Economy.com, referring specifically to data from the Energy Department.

At the same time, a build in gasoline stocks was far below the consensus estimate, though enough to keep the year-ago comparison unchanged from the prior week, he said.

The August contract became the front-month contract at Tuesday's close. July crude closed down 4 cents Tuesday, falling back from an intraday high of $69.85, following reports that China is working with Saudi Arabia to develop a strategic oil reserve, as well as a forecast of strong global energy demand for the next two decades.

July gasoline futures closed Wednesday up 6.04 cents at $2.066 a gallon after climbing as high as $2.085. July heating oil finished up 2.97 cents at $1.9371 a gallon.

Earlier Wednesday, the Energy Department said crude supplies rose 1.4 million barrels for the week ended June 16. Market expectations had been mixed.

But the report pegged total supply at 347.1 million -- their highest level since the week ended May 29, 1998. Supplies were 4.9% above their year-ago level, the government said.

Separately, the American Petroleum Institute said that crude inventories fell 3.7 million barrels to total 344.3 million.

Motor-gasoline supplies were up 300,000 barrels to total 213.4 million barrels, marking their eighth week of increases, according to Energy Department data. The government also said that supplies were 1.2% below the year-ago level. In contrast, the API said that supplies of the fuel fell 1.9 million barrels.

Distillate supplies, which include heating oil and jet fuel, rose 1.7 million barrels to 124.5 million, the government data showed, pegging the tally at 8.4% above the year-ago level. These inventories rose 1.9 million barrels, according to the API.

Crude supplies' normally see a weekly decline of around 1.6 million barrels in June, according to James Williams, an economist at WTRG Economics.

Gasoline inventories rose within the normal range, while distillates were up less than usual, but their total tally was still well above last year, he said.

So "except for the slightly higher year-over-year numbers in gasoline consumption (product supplied), there is nothing to scare the bears and send them running for the safety of the woods," he said.

"The only things supporting the current level of prices are the lack of spare crude-production capacity and geopolitics," he added.

A more than $50 climb in eight years

Iranian President Mahmoud Ahmadinejad said that Iran will respond by mid-August to the package of incentives offer by the U.N.'s Security Council and Germany, according to BBC News. The package was offered June 6 in an effort to halt Iran's production of enriched uranium, which can be a step toward the creation of nuclear energy or nuclear bombs.

Mid-August seemed like "an awfully long time" to wait for the response, President Bush said at the U.S.-European Union summit in Vienna, Austria -- calling the package a "reasonable deal," according to media reports.

"Regardless of the real progression of talks with Iran, the important thing here is that all parties seem committed to solving the standoff diplomatically," said Jester in a weekly report. "This ought to reassure investors and unwind the risk premium from oil prices in the next few weeks."

Elsewhere, South Korean President Kim Dae-jung has cancelled a visit to North Korea planned for next week on concerns about reports that North Korea is planning to test a long-range nuclear missile, the BBC reported.

U.S. government officials said Tuesday that North Korea appears to be move toward a launch. National Security Adviser Stephen Hadley cautioned, however, that "the intelligence is not conclusive at this point," according to the BBC.

The U.S. ambassador to Japan, Thomas Schieffer, said on Wednesday that the United States had a greater capacity to track missiles than in 1998, when North Korea last launched a long-range missile.

Asked whether the United States would shoot down a missile, Schieffer responded: "We have options that we have not had in the past, and all these options are on the table."

North Korea's missile plan was reported by the media over the weekend. It comes after months of talks on North Korea's nuclear ambitions failed to make any appreciable progress, with Washington more focused on the nuclear situation in Iran.

Over in Europe, the Norwegian Oil and Petrochemical Workers Union said that it will begin an oil-service worker strike on Wednesday after wage talks with oil-industry employers collapsed.

Refinery activity up

Refinery activity in the United States increased last week, but to a level that was still below the average for this time of year, an analyst said.

Refinery utilization climbed to 93.3% of capacity, from 92.7% a week earlier, according to Energy Department data.

"Even with the improvement, refinery utilization is below its historical average for this time of year," said Jester, pointing out that during June from 2000 to 2005, utilization averaged 94.9%.

"The disparity is a result of this year's particularly robust maintenance cycle, but the 2.3 percentage-point increase during the past two weeks is a good signal that operations are coming back on line at a brisk pace," he said.

Motor-gasoline demand has averaged 9.4 million barrels per day over the last four weeks -- that's 0.9% above the same time a year ago, the government said. Distillate fuel demand averaged almost 4.1 million barrels per day over the same period, or 1.1% above the year-ago level.

Looking ahead, potential hurricanes this summer are among the wildcards, according to Jester: "A good portion of domestic production still remains shut in from last year's storms."

And "even without a major storm, much of this will likely still be down through the crux of the current hurricane season in September and October," he said. Given that," prices will remain volatile into the fourth quarter, and a major storm could keep prices elevated through the end of the year."

Natural gas gains

In other energy trading Wednesday, natural gas saw its July contract climb 8.6 cents to close at $6.588 per million British thermal units after posting declines in the last three sessions.

Analysts at Strategic Energy & Economic Research expect the Energy Department on Thursday to report that natural-gas inventories for the week ended June 16 rose 74 billion cubic feet. That compares with a rise of 79 billion a year ago and a five-year average increase of 92 billion, according to SEER.

As of the week ended June 9, supplies stood at 2.397 trillion cubic feet, according to government data released last Thursday.

The highest level of working gas storage was 3.47 trillion in Nov. 1990, according to Ron Denhardt, vice president of natural-gas services at SEER.

"A new record is likely to be set this year, but the lack of experience with these levels of storage make it difficult to determine how much gas could actually be put in storage," he wrote in a note to clients Wednesday, noting that estimates range from 3.5 to 4.1 trillion.

In Wednesday's energy-linked equities trading, benchmarks tracking the oil and gas sectors rose, with the Oil Service Index
OSX, +0.37%
making the biggest move higher. See Energy Stocks.

In other futures trading, gold futures closed with a gain of more than $10 an ounce, recovering from an earlier retreat. See Metals Stocks.

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